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What is Capital Gains Tax - Part One

June 15, 2022

Capital Gains on houses and other assets you own

You may have heard the term “Capital Gains Tax” before when discussing the extremely interesting (haha) topic of tax with your friends or family. 

Capital Gains Tax on your tax return

The following discussion will attempt to give you an idea of what capital gains tax is, when it applies and at what rate it applies. This way you can impress your friends and family with your knowledge when the subject next comes up. To keep this simple we are just focusing on basic situations that commonly occur with individual taxpayers.

Let’s breakdown the term capital gains tax. The first word capital refers to capital assets. These are generally items owned by a person for investment or personal use, such as houses or shares. The second word gains, takes its normal meaning. If you sell something for more than it cost you, then you've made a gain. We all know the third word, tax. It’s the unavoidable grab by the taxation office to get a piece of your money. So, when we think of it simply, it’s a tax on the profit made on the sale of an asset.

So what items does this tax apply to? Remembering we are keeping this simple, the most common situations are the sale of an investment property, the sale of shares, and gains made within managed funds. If you are one of those high society types, then you will also be hit on the sale of your expensive collectables such as artwork and rare stamps. We aren’t too worried about you. For now, let’s look at a couple of common situations.

First step – What is the gain?

The selling of real estate.

Firstly, if you sell the house that you bought and lived in yourself, then capital gains tax doesn’t apply, yay. If you are doing pretty well and also own a rental property, then capital gains tax will impact you when it is time to sell it. In its simplest form the gain is calculated between what you bought the property for and what you sold it for, less any costs on both transactions such as legal fees and agents commission. Please note that things such as living in the house for a while has an impact on the calculation of the gain. To keep this article simple, we are not going into this detail here.

The selling of shares.

Again, it will simply be the difference between the purchase and the sale price less any costs such as brokerage. If you don’t sell all the shares purchased at one time, then the cost is usually calculated on a first bought first sold basis.

Gains in managed funds.

The managed fund will calculate this for you, that’s why you pay all those fees. The capital gains made in the funds for the year are shown on your annual tax statement.

Second step - How much tax is payable on the gain?

Well firstly if you have held the property or shares more then a year then you can apply a 50% capital gain discount. This basically means the gain calculated above can be cut in half. For example, if you bought an investment property for $300,000 and sold it for $400,000 you made a gain of $100,000. Applying the discount your net gain is $50,000. This means half of your gain is tax free. How nice of the tax office.

Commonly there is a misconception that capital gains tax has its own higher mystery rate of tax. This isn’t the case. The tax payable is your normal individual tax rates. The net gain is simply added to your other income such as wages and your normal tax rate is applied. If you had the $50,000 net gain from above and wages of $40,000 then your taxable income would be $90,000. You would pay the same amount of tax on this $90,000 as if you had earned it all as a wage.

When completing your e-tax income tax return the capital gain is declared separately. The taxation office wants both the gross gain and the net gain reported. In the example above the gross gain would be $100,000 and the net gain $50,000.

 

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Note that the information provided is general in nature and subject to change, please contact one of our professionals who can evaluate your circumstances and provide more accurate advice to your current situation.

 

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